Burns v. City of Seattle

• Decision Date: 02 August 2007
• Docket Number: No. 78449-3.,78449-3.
• Court: Washington Supreme Court
• Parties: Doris BURNS; Rud Okeson; Arthur T. Lane; Kenneth Gorohoff; and Walter L. Williams, individually and on behalf of the class of all persons similarly situated, Appellants, v. The CITY OF SEATTLE; The City of Shoreline; The City of Burien; The City of Lake Forest Park; The City of Seatac; and The City of Tukwila, Respondents.

164 P.3d 475

161 Wn.2d 129

Doris BURNS; Rud Okeson; Arthur T. Lane; Kenneth Gorohoff; and Walter L. Williams, individually and on behalf of the class of all persons similarly situated, Appellants, v. The CITY OF SEATTLE; The City of Shoreline; The City of Burien; The City of Lake Forest Park; The City of Seatac; and The City of Tukwila, Respondents.

No. 78449-3.

Supreme Court of Washington, En Banc.

Argued November 14, 2006.

Decided August 2, 2007.

David Florian Jurca, Connie K. Haslam, Colette M. Kostelec, Helsell Fetterman LLP, Seattle, WA, for Appellants.

Shelley Marie Kerslake, Kenyon Disend PLLC, Issaquah, WA, Michael Paul Guark, Bellevue, WA, Mark Sterling Johnsen, Mary E. Mirante Bartolo, City of Seatac Legal Department, Seatac, WA, Donald Stewart Cohen, Gordon Thomas Honeywell, et al., Robert William Cromwell, Jr., Suzanne Leiberman Smith, Seattle City Attorney's Office, William Howard Patton, Foster Pepper, LLC, Seattle, WA, Ian Richard Sievers, City of Shoreline Attorney, Shoreline, WA, for Respondents.

Wayne Douglas Tanaka, Seattle, WA, for Amicus Curiae — City of Lakewood, City of University Place.

Anne Louise Spangler, Tacoma City Attorneys Office, Legal Department, Tacoma, WA, for Amicus Curiae — City of Tacoma.

MADSEN, J.

¶ 1 Seattle City Light (SCL) entered into franchise agreements with the cities of Shoreline, Burien, Lake Forest Park, Seatac, and Tukwila (Cities). At issue in this case is the validity of a contractual provision common to each of the agreements, whereby SCL agreed to pay a percentage of revenues received from the Cities' power customers in exchange for the Cities' promise to forbear from establishing their own municipal electric utilities. The petitioners, representing a class of SCL ratepayers, contend that the payment provision violates RCW 35.21.860(1), which in relevant part provides that "[n]o city or town may impose a franchise fee or any other fee or charge of whatever nature or description upon the light and power . . . . distribution business[]." We hold that the contractual payment provision does not fall within the statutory prohibition because the Cities did not exact the payments through their governmental powers of taxation and regulation. Rather, acting in a proprietary capacity, the Cities negotiated the payment provision as consideration for a special benefit conferred on SCL independent from the privilege of operating a franchise. We affirm the summary judgment order dismissing the action.

FACTS

¶ 2 SCL is a municipal electric utility that serves customers both within and without city limits. In the early 1990s, several of the suburban areas served by SCL incorporated, including Shoreline, Burien, and Seatac. Lake Forest Park incorporated in 1961. Prior to the negotiation of the franchise agreements at issue here, SCL served these areas either without a franchise agreement or under an agreement with King County to serve certain unincorporated areas. SCL has operated under a franchise agreement with the city of Tukwila since 1958.

¶ 3 Upon incorporation, the Cities gained the authority to grant a franchise to SCL or another utility. RCW 35A.47.040. The Cities also gained the authority to form their own municipal electric utilities. RCW 35.92.050. Shoreline hired a consultant to help it explore its options. The city of Tukwila, whose franchise agreement with SCL would expire in 2008, entered into discussions with Burien and a number of other cities in south King County concerning the feasibility of forming a joint municipal utility. Several of the cities had concerns about the rates and services provided by SCL and viewed municipalization of the electric utility as a means of gaining greater control over these issues.

¶ 4 Municipalities may impose a six percent utility tax for the privilege of conducting a power distribution business. RCW 35.21.870. The city of Seattle imposes such a tax on SCL's gross revenues, including revenues received from its suburban utility customers. However, SCL has taken the position that the Cities may not impose such a tax on another municipality's electric utility. The Cities' ability to impose a utility tax on SCL is clouded by legal uncertainty. The Cities were concerned that the utility tax paid by SCL customers supports only Seattle's general fund, not their own. The availability of utility tax revenue was a significant concern of the Cities as they considered whether to grant SCL a franchise or, alternately, whether to grant a franchise to a private utility or form a municipal utility.

¶ 5 The city of Shoreline sought legislation that would have required Seattle to grant a tax credit to SCL's suburban customers for any utility taxes imposed by the city in which the customers resided. H.B. 2708, 55th Leg., Reg. Sess. (Wash.1998). The Bill Analysis explained that the purpose of the legislation was to avoid double taxation of municipal utility taxes, which could occur when a municipal electric utility provides services outside its city limits. HOUSE COMM. ON FINANCE, H.B. REP. on Substitute H.B. 2709, 55th Leg., Reg. Sess. (Wash.1998). The proposed legislation prompted SCL and Seattle to accelerate negotiations with the Cities. SCL wanted to secure its ratepayer base while at the same time preserving Seattle's ability to generate revenue for its general fund through the utility tax.

¶ 6 SCL was concerned that a shrinking rate base would impair its ability to provide low rates and efficient service. A stable ratepayer base is important to avoid "stranded costs," to secure more favorable bond ratings, and to obtain a better wholesale rate for power purchases. In addition, the size of SCL's ratepayer base could be a significant factor in SCL's ability to renew its federal license to operate the Boundary Dam, which expires in 2011. The amount of power that federal licensing authorities authorize SCL to extract from the dam will depend, in part, on the size of the ratepayer base.

¶ 7 At the same time a number of suburban areas served by SCL incorporated, deregulation of the industry became a significant issue for the utility. Deregulation involves the uncoupling of the three primary elements of the electrical industry: the generation, transmission, and distribution of electrical energy. See Cal. ex rel. Lockyer v. Fed. Energy Regulatory Comm'n, 383 F.3d 1006 (9th Cir.2004) (explaining principles in context of California's deregulation of the power industry) (cert. denied sub nom. Coral Power, L.L. C. v. Cal. ex rel. Brown, ___ U.S. ___, 127 S.Ct. 2972, ___ L.Ed.2d ___ (2007)). Under deregulation, retail customers could purchase power from different providers, while SCL would retain a monopoly on the distribution portion of its business only. The twin prospects of deregulation and competition from suburban utilities created a climate of considerable uncertainty for SCL.

¶ 8 Accordingly, SCL entered into negotiations with the Cities in order to "stabilize its long-term power interests in a deregulated environment." Clerk's Papers (CP) at 1118 (deposition transcript of the former SCL superintendent, Gary Eugene Zarker). Each of the Cities granted SCL a nonexclusive franchise for the operation of an electric utility within the right-of-way. Each of the franchise agreements is embodied in a city ordinance adopted by the respective city government. The franchise agreements provide that SCL shall pay the Cities six percent of the revenues derived from retail power sales to city residents in consideration for the Cities' agreement not to exercise their authority to establish a competing municipal electric utility for the duration of the franchise. SCL further agreed to recover the six percent payment system-wide, rather than surcharging the Cities' utility customers. In addition, SCL agreed that any rate differential for customers served outside the Seattle city limits would not exceed eight percent. The contractual payment provision, which is substantially the same for each of the contracting cities, provides:

4. Consideration. It is recognized by the City and by SCL that the City has the authority to establish its own municipal electric utility, and the authority to acquire SCL electric distribution properties in the City for that purpose.

4.1 In consideration for the City agreeing not to exercise such authority during the term of this franchise, SCL agrees to the following:

4.1.1. SCL shall pay the City six percent of the amount of revenue derived from the power portion of SCL service to customers in the City, and shall pay the City zero percent of the amount of revenue derived from the distribution portion of SCL service to customers in the City.

4.1.2. SCL shall not include any part of the power portion of the payment to the City provided in Section 4.1.1. above as a component of any rate differential between customers served by SCL in the City and customers served by SCL in other jurisdictions.

4.1.3. SCL shall not charge greater than an eight percent differential in the power portion of the rates to customers in the City compared to the power portion of the rates charged to similar customers in the City of Seattle.

CP at 651.

¶ 9 SCL entered into a franchise agreement with Shoreline in 1999. The Shoreline agreement became a model for similar agreements with the other cities. Tukwila was the last to negotiate a franchise agreement, which replaced an existing franchise agreement set to expire in 2008. SCL has sent the payments to the cities. Billing correspondence and other administrative documentation refers to the payments as "franchise fees." SCL treats the payments as an operating expense and factors the expense into the rates charged to all of its customers. In exchange, the Cities have not formed their own electric utilities.

¶ 10 On July 27, 2005, the petitioners filed a complaint against the Cities on behalf of themselves and the class of similarly situated persons, seeking declaratory, injunctive,...